Friday, November 21, 2008

Cleaning Up and Repairing Your Credit Rating

It can happen to anyone. You get a credit card and start spending beyond your reach, or someone gets a hold of your social security card or an old credit card and opens up new cards in your name. The question is not how this happened, but what you can do now to clean up and start repairing your credit rating.

As you start to clean and repair your credit rating, be aware that some companies may try to take advantage of you. They may offer programs and books that, for a fee, will "erase" your bad credit. These books and companies cannot efface your credit card debt. There is no one solution or service that will suddenly fix all your credit problems. Good credit comes from good credit practices over time - especially concerning credit card payments.

Cleaning Up Your Credit RatingCheck your credit history. There are three national credit bureaus from which you can obtain a copy of your credit history. This report will give you a complete picture of your current credit situation and will allow you to check for inaccuracies. Any inaccuracies you find should be corrected immediately by contacting the creditor with whom the error resides.

Don't apply for many credit cards over a short period of time – A lot of inquiries in a short period of time looks bad and can impact your credit rating. This doesn’t mean you can’t shop around for the best deal on car loans or other larger purchases, but you should minimize the number of credit cards for which you apply, such as store or other promotionally motivated cards. As long as your inquiries for an automobile or mortgage deal are all within a 30-day period, many credit scoring programs and creditors will disregard the multiple inquiries or consider them as a single inquiry.

Know how much you owe – You should always know exactly how much you owe on your credit cards. If you have several cards with balances close to their limit, creditors might worry that you are living beyond your means. In general, debt of 75% or more of your total available credit does not look good. If you are high on your balances, concentrate on paying them down before charging more.

Close inactive or old accounts – There is no reason to keep an account open that you don’t use anymore. Banks and credit companies look at your total debt potential when determining whether or not to approve you. An old open account could cause you problems; therefore, the fewer accounts you have open, the lower a risk you are to your potential creditors. See Do’s and Dont's of Closing Accounts for more information.

Repairing Your Credit Rating Open a gas or department store credit card – If you have some serious credit issues from the past, a gas or department store can help you start repairing your credit rating. By using the card regularly and making your payments on time, you will establish yourself as a careful credit user.

Pay down balances – Paying down your current credit card balances will go a long way toward repairing your credit rating. If these payments are beyond your means, contact the credit card company directly to discuss your options. It is better to be upfront and honest with them than to avoid payments altogether. Typically, once an account goes to a collection service, the credit card company will not be able to work with you. Instead, you will be causing more damage to your credit rating.

Be responsible – How good your credit rating is or is not depends on you. Be responsible with your spending habits and know when it is good and not good to use credit.

Discuss your options with a financial advisor – A financial advisor can help you determine a strategy for managing your debt. S/he can offer options on how best to repair your credit rating with your current financial resources.

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